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E*Trade Financial Group agreed to sell its Canadian operations to Bank of Nova Scotia for $442 million and said the sale and return of related capital would generate about $511 million for the struggling online brokerage firm.

The news sent shares of ETrade up 8.5% to $2.67 in after-hours trading, recovering most of its losses from the regular trading session. ETrade, hurt with most regional banks on Monday, closed at $2.46, down 9.6%.

In April, E*Trade, which has been rocked by the turmoil in the housing market, swung to a first-quarter loss but said it had made "significant progress" in reducing the risk on its balance sheet and would cut costs further this year.

In June, E*Trade said it reduced its debt by $95.8 million during the second quarter through a series of debt-for-equity exchanges. The online broker, which has cut its debt by $155.8 million year-to-date, has targeted a $700 million reduction this year through debt-for-equity swaps and conversion of its mandatory convertible notes in November.

"It's a sizeable chunk of money that they are selling the business for and it will help them pay down their debt and improve their capital ratios," said Raymond James analyst Patrick O'Shaughnessy.
He added that the sharp decline in E*Trade's share price, however, makes debt for equity swaps "not very shareholder friendly."

"They probably want to minimize that to the extent that they can," he said.

E*Trade took a beating amid the mortgage meltdown last year, which forced the resignation of Chief Executive Mitch Caplan in November. In January, the company put forward a plan to get back in the black by the end of the year by selling assets and raising capital.

Layton has won praise at hedge fund Citadel Investment Group - which holds 20% of the company after a cash infusion last fall - for helping put E*trade on firmer financial ground.

Separately, Toronto-based Bank of Nova Scotia said the acquisition will double its footprint in the growing Canadian online investing market.

The move is part of its stated focus on expanding its wealth-management business, and will boost its retail-banking operations. Bank of Nova Scotia’s discount brokerage business lags behind industry leader TD Waterhouse, which is owned by Toronto Dominion Bank.

The acquisition comes at a time when it is difficult to acquire new retail customers other rather by wooing them from rivals. The acquisition will also serve as an avenue for Bank of Nova Scotia to sell other retail products to the E*Trade customers it will acquire.

In Toronto, Bank of Nova Scotia ended Monday at 43.82 Canadian dollars, down C$1.64.